Real Estate

Hungarian Land Remains in Hungarian Hands: Acquisition Privilege for Local Farmers

Foreign investors may stop viewing Hungarian farmland as a preferred investment target on a longer term, as the government plans to pursue extensive intervention in land sales. The bill of the New Land Act has been submitted to the Hungarian Parliament for approval. It introduces strict restrictions on leasehold and ownership title transfer of agricultural land and forestry after the transitional sale moratorium, expiring on 30 April 2014. Non-discrimination and EU compliance is stated, but will be tested.

Purchase moratorium to end soon

Back in 2004, the country’s EU acces­sion treaty intro­duced tran­si­tion­al mea­sures to exempt the nation­al mar­ket from the fun­da­ment of free move­ment of cap­i­tal and to pro­hib­it land pur­chas­es by for­eign­ers until 2011. The mea­sures were put in place in an effort to pre­vent wealthy Euro­pean investors from a mas­sive takeover of cheap arable lands in Hun­gary, a less devel­oped new mem­ber state. Based on gov­ern­men­tal ini­tia­tive, the tran­si­tion­al peri­od was extend­ed to 30 April 2014.

The cur­rent regime gen­er­al­ly pro­hibits land own­er­ship by both domes­tic and for­eign legal enti­ties and by for­eign pri­vate indi­vid­u­als. In addi­tion, there is an upper lim­it of 300 hectares of max­i­mum own­er­ship by a domes­tic nat­ur­al per­son. As one of the rare excep­tions applic­a­ble to acqui­si­tion by for­eign­ers, EU nation­als will­ing to act as self-employed farm­ers may be sub­ject to the same rules that apply to Hun­gar­i­an nation­als, if they have been legal­ly stay­ing and farm­ing in Hun­gary for at least three years.

As no fur­ther exten­sions are pos­si­ble, Hun­gary would have to open its land mar­ket to invest­ments from EU/EEA mem­ber states, effec­tive from 1 May 2014.

New constraints in the farmers’ interest

With the land trans­fer moratorium’s end and the EU mar­ket open­ing in view, the gov­ern­ment seem­ing­ly wants to set in con­crete new acqui­si­tion rules and induce changes to the own­er­ship struc­ture and socio-eco­nom­ic sta­tus in the agri­cul­tur­al sec­tor by leg­isla­tive mea­sures.

The word­ing of the recent leg­isla­tive pro­pos­al of the Min­istry of Rur­al Devel­op­ment sug­gests that the New Land Act is meant to pro­mote land for­ma­tion and prof­itable farm­ing of res­i­dent fam­i­ly estate busi­ness­es, small­hold­ers and medi­um-scale pro­duc­ers oper­at­ing on mid­dle-size plots up to 500 hectares. In terms of macro lev­el effi­cien­cy, it is also com­mu­ni­cat­ed that pri­or­i­ty will be giv­en to mod­ern co-oper­a­tive struc­tures, as opposed to large-scale mono­cul­ture farm­lands.

The New Land Act would con­tin­ue to pro­hib­it land pur­chas­es by any form of for­eign or domes­tic legal enti­ty.

Pur­chas­es by EU/EEA pri­vate indi­vid­u­als would the­o­ret­i­cal­ly be released from trans­fer bans, as they will be gov­erned by the same rules as those applic­a­ble to Hun­gar­i­an nation­als. How­ev­er, a par­al­lel intro­duc­tion of numer­ous new con­straints and pos­i­tive dis­crim­i­na­tion for farm­ers against oth­er pri­vate indi­vid­u­als would actu­al­ly make acqui­si­tions even more dif­fi­cult than before.

The fol­low­ing key own­er­ship restraints are planned to be intro­duced by the New Land Act:

  • Non-farm­ers are gen­er­al­ly not allowed to acquire arable land. Only per­sons car­ry­ing on agri­cul­tur­al pro­duc­tion as a main income-gen­er­at­ing activ­i­ty, hav­ing ade­quate agri­cul­tur­al qual­i­fi­ca­tion and tools for agri­cul­tur­al oper­a­tions may qual­i­fy as farm­ers and be record­ed in a rel­e­vant plough­men reg­istry. Farm­ers apply­ing for land acqui­si­tion must have per­ma­nent res­i­dence with­in 20 km of the cen­tre of the land to be pur­chased.
  • The con­cept of pre­lim­i­nary author­i­ty approval of arable land trans­fers will be imple­ment­ed, result­ing in pend­ing con­trac­tu­al title trans­fers until per­mis­sion is grant­ed.
  • There would be a dis­tinc­tion between agri­cul­tur­al entre­pre­neurs in terms of max­i­mum size of acquirable land owned and in lease­hold. Includ­ing lands pre­vi­ous­ly acquired, self-employed farm­ers may hold a max­i­mum of 50 hectares; indi­vid­ual entre­pre­neurs and tra­di­tion­al small-scale pro­duc­ers could have 300 hectares; while fam­i­ly farms’ aggre­gate estate hold­ing may not exceed 500 hectares, indi­vid­u­al­ly.
  • Close rel­a­tives’ absolute aggre­gate estate max­i­mum,– includ­ing past and future estate and lease­holds under dif­fer­ent legal titles, and max­i­mum indi­vid­ual estate hold­ing and lease­hold of agri­cul­tur­al plants and inte­gra­tions – is pro­posed to be 1,200 hectares. (The­o­ret­i­cal­ly, agri­cul­tur­al plants — defined as organ­i­sa­tion­al units of inte­gra­tion of land and rel­e­vant tools and assets – can grow beyond, as join­ing mem­bers’ exist­ing estates are not includ­ed in the thresh­old. The plants may also estab­lish coop­er­a­tion with oth­er plants.)
  • Busi­ness asso­ci­a­tions (ie, legal enti­ties) can keep on using and oper­at­ing lease­holds for agri­cul­tur­al pur­pos­es, but they will be sub­ject to sig­nif­i­cant employ­ee head­count require­ments in excess of 300 hectares; the above 1,200 hectares thresh­old will also apply to them.
  • For estate pol­i­tics pur­pos­es, the Hun­gar­i­an state would still be giv­en statu­to­ry pre-emp­tive right.

No retroactive effect

Con­trary to cer­tain pre­lim­i­nary reports, the New Land Act’s word­ing pro­pos­al clear­ly reflects that only future rela­tions are affect­ed. Exist­ing own­er­ship and lease­holds remain untouched.

This prospec­tive effect also implies that large-scale agri­cul­tur­al oper­a­tions whose size extends over new leg­isla­tive estate thresh­olds can be main­tained.

Controversial feedback, EU compliance questionable

Large-scale mono­cul­ture farms, which dom­i­nate the cur­rent land­scape by pos­sess­ing 90% of arable lands, and finan­cial insti­tu­tions have expressed con­cern about los­ing macro-lev­el effi­cien­cy and com­pet­i­tive­ness, and thus weak­en­ing the sec­tor’s financ­ing capa­bil­i­ty.

Lease­hold max­imi­sa­tion may seri­ous­ly harm the prof­itabil­i­ty of ani­mal hus­ban­dries, typ­i­cal­ly oper­at­ed by com­pa­nies on larg­er lands.

From a dif­fer­ent angle, small­hold­ers fear this unprece­dent­ed state inter­ven­tion does not real­ly sup­port the imple­men­ta­tion of a work­able West­ern Euro­pean socio-eco­nom­ic mod­el of fam­i­ly farms, but rather con­firms the cur­rent posi­tion of large mono­cul­ture indus­tries. Estate con­cen­tra­tion is already huge in Hun­gary and will appar­ent­ly stay untouched. Large-scale plants may even extend their estates by inte­grat­ing mem­bers’ and oth­er plants’ lease­holds in the oper­a­tion, squeez­ing out res­i­dent farm­ers. Experts believe that the antic­i­pat­ed lev­el of con­cen­tra­tion is against diver­si­ty, coun­try­side organ­ic devel­op­ment, local sup­pli­ers’ sup­port and, ulti­mate­ly, Hungary’s food­stuff auton­o­my.

The licenc­ing by author­i­ties of land pur­chas­es also enables sub­jec­tive deci­sions and increas­es the risk of dis­crim­i­na­tion and cor­rup­tion.
The pub­lic-inter­est, non-dis­crim­i­na­tive (ie, EU law com­pli­ant) nature of the pro­posed restric­tion of free move­ment of cap­i­tal and the mar­ket econ­o­my com­pli­ance of these mea­sures are also ques­tions that must still pass the test of EU insti­tu­tions.

Smallholders fear unprecedented state intervention does not really support the implementation of a workable Western European socio-economic model of family farms, but rather confirms the current position of large monoculture industries with good political connections.

roadmap 13
schoenherr attorneys at law /